India’s Free Fire ban – buying opportunity?
? Shopee is a price leader in its monetisation plans vs. peers, with the recent hikes in Feb 22 merchant commissions in Indonesia (range from +40-67%).
? We think market may have underappreciated Seabank’s growth potential as it achieved profitability in the month of Dec 21, in its first year of operation.
? Current share price ascribes zero value to SE’s DFS (including Seabank), Garena: 15x FY23F P/E, Shopee: 4.7x FY23F P/S. Reiterate Add.
Deepening monetisation in Southeast Asia
Our competitive analysis indicates that Shopee is leading ecommerce monetisation in Southeast Asia. YTD, Shopee has announced marketplace commission hikes in Indonesia (by 40-67%) and Malaysia (doubled commission for non-preferred sellers); fees were also introduced for its Vietnam marketplace. This, along with deepening monetisation of ad inventory on Shopee, should drive further take rate growth to 7.6% in FY22F (FY21F: 6.6%) and aid narrowing losses in its ASEAN markets, in our view. Shopee has presence in 9 of the top 10 countries ranked by retail ecommerce sales growth in 2022 (according to EMarketer); we forecast it to remain one of the fastest growing ecommerce platforms globally, with 45%/60% growth in GMV/revenue in FY22F.
What’s (not) in the price
Reversing our SOP valuation, assuming 15x FY23F P/E for gaming segment Garena (20% discount to gaming peers), investors are only paying 4.7x FY23F P/S for Shopee (c.1 s.d. below long-term historical average of close peers, including Mercado Libre and Alibaba), while attributing zero value to SE’s digital financial services (DFS) and US$11bn net cash (end-3Q21). Note that the DFS segment includes SeaBank, a leading digital bank in Indonesia ranking No. 1 in loans and No. 2 in deposits as of end-Nov 2021. SeaBank has been scaling up rapidly, especially in 4Q21, with attractive savings rate of up to 7%, and had turned profitable in Dec 21, within the first year of operations. We note that Bank Jago (ARTO IJ, Add, TP: Rp20,000, CP: Rp14,150), which has similar loan size but less than half of SeaBank’s deposits, currently has a US$14.5bn market cap.
Free Fire’s woe could present buying opportunity; reiterate Add
Garena Free Fire was added to India’s list of banned apps for its “Chinese origin” today; we think this could cause a knee-jerk reaction in SE’s share price, as India makes up c.10% of Garena’s MAU, according to IGN. However, we note that the voting rights change in favour of SE chairman and CEO Forrest Li was approved in today’s AGM (bringing Tencent’s voting rights in SE to below 10%), which could make the case for SE’s continued operations in India. We remove SE from our high conviction list as nearterm visibility remains challenging but continue to like its longer-term potential given strong e-commerce leadership in ASEAN, immense DFS growth, backed by a robust cash-generating gaming business. Our SOP-based TP is cut to US$288 as we lower our target multiples for the gaming and e-commerce segments against the macro backdrop. Re-rating catalysts: passive fund inflows in end-Feb on rebalancing of MSCI indices, more disclosures on e-commerce providing clarity on core vs. new markets’ performance.